Managing security holdings risk during portfolio trading

ABSTRACT

The present invention provides methods and systems for managing short-term risk to a portfolio of securities holdings while executing an outstanding trade list. The methods and systems may include steps of determining covariances between securities in the outstanding trade list and securities in the portfolio of holdings; receiving a risk variable, at least one constraint on the execution of a trade, and a proposed quantity representing a portion of said outstanding trade list desired to be executed at a particular time; and determining an immediately executable trade list based at least in part on the covariances and risk variable. The executable trade list must satisfy all of the trade constraints and also must be substantially equal to or less then the proposed quantity.

REFERENCE TO RELATED APPLICATION

This application is a continuation-in-part of U.S. application Ser. No.10/376,599 filed on Mar. 3, 2003. The entirety of U.S. application Ser.No. 10/376,599 is incorporated herein by reference.

BACKGROUND OF THE INVENTION Field of the Invention

This invention relates generally to trading strategies in securitiesmarkets. Particularly, this invention relates to a method and system forautomatically determining an immediately executable trade list, or“wedge,” which both satisfies user constraints, and advances theobjectives of the traders, such as minimizing the overall risk to aportfolio of financial security holdings.

Background of the Related Art

Various automated trading systems are known, which execute so-called“program” trading strategies in response to market movements.

Generally, portfolio managers for large institutional investors, such asmutual funds, hedge funds, etc., are responsible for trading largeblocks of financial securities. These portfolio managers typicallyprefer not to send large market orders, which may have adverse marketimplications creating inferior execution prices. However, a portfoliomanager's desire to avoid negative trade implications must be balancedwith the time frame within which the portfolio manager's trades must becompleted. In order to best satisfy the competing criteria, portfoliomanagers, generally, divide large trade blocks of financial securitiesinto multiple smaller portions which are sent over the given time frameaccording to a predefined trading strategy. Generally, such a predefinedtrading strategy would minimize risk to the unexecuted portion of thelarger trade block by minimizing unfavorable market movements caused bythe execution of the smaller orders.

An example of a known trading strategy is the treatment of an unexecutedtrade list as a long-short portfolio and utilizes a multi-factor riskmodel to construct a minimal risk “portfolio” of unfilled orders to besent simultaneously for execution. The minimal risk “portfolio” whenexecuted minimizes the risk to short-term return of the unexecuted tradelist.

The Markowitz Model (as described in “Portfolio Selection,” Dr. H. M.Markowitz, Journal of Finance, Mar. 7, 1952), is a well-knownoptimization strategy that balances the expected return and risk of aportfolio to allow the construction of one such minimal risk“portfolio.” The decision variables used in the model are the amountsinvested in each asset. According to this model, the statisticalvariance of a stock's price is used as a measure of its risk, theexpected return of the stock is used as a measure of its utility orlong-term prospects, and the variance of a portfolio's return is derivedfrom the covariances for the returns of the individual assets in theportfolio.

Variance is a measure of fluctuation in the rate of return of an asset,such as a financial security. Generally, higher variance levels indicatehigher risk investments. Covariance is a measure of the correlationbetween return fluctuations of multiple assets. A high covariancebetween two assets indicates that an increase or decrease in one asset'sreturn is likely to correspond to a parallel increase or decrease in thesecond asset's return. Conversely, a negative covariance indicates thatan increase or decrease in one asset's return is likely to correspond toan opposite increase or decrease in the second asset's return. Moreover,a low covariance indicates that the return rates of the two assets arerelatively independent, meaning an increase or decrease in one asset'sreturn will have little or no effect on the return of another asset.Thus, the risk of a portfolio is best determined not by a simpleweighted average of the risks of individual assets in the portfolio, butinstead by assessing the relationships between the returns of thevarious individual assets in a portfolio.

A shortcoming of the known trading risk objective model is that it failsto account for short-term effects that each trade has on the overallportfolio of holdings, which includes securities not to be traded andunexecuted securities to be traded. Further, this shortcoming isexacerbated when portfolio managers must adhere to certain constraintsin their trades, thus limiting the viable options for any given trade.

Thus, there exists a need for improvements in the art which allows forproper selection of the best trade option from all viable trade optionswhich a portfolio manager has available. This selection should be basedon both the objectives of and constraints on the individual trades.

SUMMARY OF THE INVENTION

According to embodiments of the present invention, methods and systemsare provided for managing short-term risk to a portfolio of securitiesholdings while executing an outstanding trade list.

In one embodiment, the present invention includes the steps of:determining covariances between securities in the outstanding trade listand securities in the portfolio of holdings; receiving at least oneobjective to be achieved by the trade; receiving at least one constraintfor the execution of a trade; receiving a percentage of value of theoutstanding trade list desired to be executed in the current wave oftrading; and determining an immediately executable trade list based atleast in part on the covariances, the at least one objective, and the atlease one constraint, the executable trade list satisfying the at leastone constraint, and the proposed quantity.

In another embodiment, the present invention includes: means fordetermining covariances between securities in the outstanding trade listand securities in the portfolio of holdings; means for receiving atleast one objective to be achieved by the trade; means for receiving atleast one constraint for the execution of a trade; means for receiving apercentage of value of the outstanding trade list desired to be executedin the current wave of trading; and means for determining an immediatelyexecutable trade list based at least in part on the covariances, the atleast one objective, and the at lease one constraint, the executabletrade list satisfying the at least one constraint, and the proposedquantity.

The present invention will become more fully understood from theforthcoming detailed description of the preferred embodiments when readin conjunction with the accompanying drawings. Both the detaileddescription and the drawings contain various embodiments of the presentinvention, and are given by way of illustration only. The presentinvention, as claimed, is not limited to any particular embodiments setforth in the detailed description and the drawings.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a flow diagram of a process for determining a minimal riskresidual trade list in an environment without constraints;

FIG. 2 is a block diagram of a system for implementing the process shownin FIG. 3;

FIG. 3 is a flow diagram of a process for determining a minimal riskimmediately executable trade list in an environment which includes atleast one constraint;

FIG. 4A is a screen shot of a user interface according to an embodimentof the current invention; and

FIG. 4B is a screen shot of a user interface according to an embodimentof the current invention.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS

As shown in FIG. 1, a trading risk model can be implemented by a Systemthat can include a server 101, which is in communication with variousexchanges, such as an Electronic Communication Network (ECN) 105, theNew York Stock Exchange 106, the NASDAQ/OTC market 107, and other likemarkets/exchanges. A client 102 may be composed of a PC, workstation orsimilar device, and may be directed coupled to the server 101; otherclients, such as client 103, can be coupled to the server 101 through adistributed communication network 104, which may be the Internet, a WideArea Network (WAN), a Local Area Network (LAN), or any other similartype of communication network.

FIG. 2 illustrates a flow diagram of a method according to an embodimentof the present invention. At step 201 a trader or other user inputs tothe server 101 the trade name (e.g., stock name or symbol), trading side(i.e., buy or sell) and quantity (e.g., dollar amount or number ofshares) for each component X_(ti) of a desired trade list X_(t). Here,BUYS may be denoted by a positive (+) sign and SELLS may be denoted by anegative (−) sign. At step 203, the trader or user inputs the tradename, side (i.e., long or short) and quantity of each component X_(li)of a portfolio of initial holdings X_(l). Again, long positions may bedenoted by a positive (+) sign and short positions may be denoted by anegative (−) sign.

At step 205, a covariance matrix R may be constructed containing thecovariance R_(ij) for the components X_(tij) in the trade list, and thecovariance R_(ij) for the components in X_(t) against the components inX_(l). The covariance R_(ij) between any two trade names can bedetermined from historical trading data.

Next, at step 207, the quantity of shares (in terms of dollar amount,share amount, or percentage value of the total trade list) desired to betraded in a current wave are inputted. This number may be determined inaccordance with a specific trading strategy used by the trader (i.e.,automated trade strategy or manually implemented) taking into accountvarious market data parameters. Such trading strategies are generallywell known in the art and thus will not be further discussed herein.

Once the quantity of shares to be executed in a current wave isinputted, at step 209 the components X_(ei) of an execution trade listX_(e) are determined that will minimize the risk to the resultingresidual trade list X_(r) as well as the static portion of the overallportfolio, which consists of the initial holdings X_(l), plus anyholdings X_(e) acquired in previous waves. Since the expected returnterms are linear and X_(t) is fixed, it is equivalent to determine thecomponents X_(ri) of the residual trade list X_(r).

The risk associated with the residual portfolio holdings may berepresented by the matrix term

X _(r) ^(T) RX _(r),

wherein all of the covariances among the residual securities are summed.Similarly, the risk associated with the residual-plus-static portfolioholdings may be represented by the matrix term

(X _(l) +X _(e) −X _(b))^(T) R(X _(l) +X _(e) −X _(b)),

wherein X_(b) is a benchmark term (which may be zero).

Here, the notion of short term return α_(st) for each of the componentsof the residual trade list and the static holdings is defined as theexpected return over the time during which the trade list X_(t) isimplemented. For the purposes of the present invention, the notion ofshort-term return is separated from any long-term return prediction thatresulted in the choice of the trade list X_(t) in the first instance.Similarly, the notion of short-term risk λ_(st) for each of thecomponents is defined as an expected risk over the time that the tradelist is implemented.

An objective function may now be constructed of the form

c _(e)[α_(st)(X _(l) +X _(e))−λ_(st)((X _(l) +X _(e) −X _(b))^(T) R(X_(l) +X _(e) −X _(b)))]+c _(r)[α_(st) X _(r)−λ_(st) X _(l) ^(T) RX_(r)],

which takes into account the short-term interests of both the trader andthe portfolio manager. The constants c_(e) and c_(r) may be used to biasthe solution towards the overall holdings or the residual trade list.The objective function is solved for its maximum value so as todetermine a minimal risk residual trade list X_(r) (and thus anexecution portion X_(e)) which also takes into account the short-termrisk to the portfolio holdings.

At step 211, it can be determined whether the entire trade list X_(t)has been completed. If so, the process ends at step 213; if not, theprocess returns to step 207 to input the quantity desired for the nexttrading wave.

As indicated in the above equations, the short-term risks and returnsare evaluated by including terms in the equations corresponding to eachof the risks/returns to be considered when creating the minimal riskresidual trade list or immediately executable trade list.

FIG. 3 illustrates a flow diagram of a method according to anotherembodiment of the present invention. In this method, steps 301, 303, and305 the steps are identical to steps 201, 203, and 205 of FIG. 2.

At step 309, the portfolio manager or other user inputs at least oneobjective to be achieved by a current trade. The minimization of risk isone example of a possible objective for a trade. At step 311, theportfolio manager or other user inputs at least one constraint on thetrade execution. The use of “All-or-Nothing” trades (further definedbelow) where all or none of any one stock may be traded, is an exampleof one possible constraint on a trade.

At step 313, the portfolio manager or other user inputs the percentageof the trade list's value to execute during the current wave of trading.For example, if a trader wants to execute 25% of the value of a tradelist worth $100,000, the optimized immediately executable trade listoptimally would be worth $25,000. Collectively, steps 309, 311, and 313make up the user inputs for each round of optimization, step 307.

At step 317, the Core Optimization Engine finds the optimal immediatelyexecutable trade list or wedge. This Core Optimization Engine usestechnology well known in the art, such as mixed integer programming, tosolve complex proprietary equations. If the immediately executable tradelist does not equal the value input of step 313 and the user has enabledthe feature of variable progress, an additional step is taken at 319which adjusts the optimal immediately executable trade list to a valuewhich is less than or equal to the value input of step 313. This“Variable Progress” adjustment is still governed by the input of steps309 and 311. Collectively, steps 317 and 319 are the optimizationengine, 315.

At step 321, an optimal immediately executable trade list or wedge whichsatisfies the user inputs of 309, 311, and 313 is displayed to the user.At this point, the user may then act on the suggestion and trade thesecurities in the current wave.

If after executing a wave of trades, the trade list, X_(t), has not beencompletely executed, the user may again use the method shown in FIG. 3,as described above, to determine the next wave of trades. However, eachoptimization iteration can be separate and distinct, and may be governedby objectives and constraints which are the same and/or different.Further, it may be required that a trader use the method more than once.For example, a trader might use the current invention to solve for aparticularly difficult trading problem, and once that problem has beensolved turn to a different system to establish the next wave of trading.

FIGS. 4A and 4B are two screen shots of a user interface according to anembodiment of the present invention. User interface 400 can beconfigured to allow entry of variables, objectives, and constraintswhich are used by the system in managing short-term risk to a portfolioof securities by generating immediately executable trade lists or wedgesthrough the method described above and shown in FIG. 3. The userinterface may be used with the invention as described in any of theembodiments above.

At field 401, a user can select a tradelist to be optimized. Tradelistscan include a mix of BUY trades, SELL trades and stocks from multiplecountries.

At field 403, a user can select a date on which to run the optimization.This is called the “as of” field. Most usage is for live trading, so thecurrent date is selected. However, historical data is available fortesting and evaluation of the system.

At field 405, a user can select the currency in which to display prices,trade values and other currency-based quantities.

At field 407, a user can select the use of real-time prices. Whenoptimizing a tradelist during trading hours, real-time prices may beused to value the trade amounts. By default, closing prices from the “asof” date are used.

Fields 409, 411, 413, 415, 417, 419, 421, 423, 425, 427, 429, 431, and433, all are inputs relating to the immediately executable trade list orwedge.

At field 409, a user can input an objective “Initial Wedge Size.” The“Initial Wedge Size” means the desired amount of trading progress to bemade by the immediately executable trade list expressed as a percentageof tradelist value. For example, if a tradelist has a total value of$100 and this parameter is set to 20%, then the wedge will have a valueof $20 and the residual tradelist $80. This field is called the initialwedge.

At fields 411 and 413, a user can provide for additional immediatelyexecutable trade lists or wedge(s) to be displayed at a given interval.Up to four additional wedges may be generated to compare the propertiesof wedge and residual lists at multiple progress amounts. Continuing theprevious wedge example, if two additional wedges at ten percent progressare specified, then wedges at 20% (initial), 30% and 40% would becreated. This feature allows a trader to easily explore differenttrading options and strategies.

At field 415, a user can select as an option “Variable Progress.”“Variable Progress” allows the immediately executable trade list isallowed to be equal to or less than the received percentage of valuewhile at least one constraint is satisfied. In certain cases,constraints on a trade wave may make reaching the specified progress,i.e., the value desired to be traded in the immediately executable tradelist, infeasible. Setting Variable Progress to TRUE makes progress asoft constraint, allowing the other constraints to be honored; theprogress in an output wedge may then be less than or equal to thespecified input.

At field 417, a user can select as an option “Round Lot Trades.” “RoundLot Trades” is a constraint that limits trade amounts in the immediatelyexecutable trade list to be in round lot amounts. Optimization operateson continuous variables, which means an immediately executable tradelist may contain fractional or share amounts rounded to the nearestshare (e.g., 347 shares). Trading is typically done in round lot sizes(usually 100 shares in the United States). Setting this parameter toTRUE will force the trade amounts in a wedge to be in round lot amounts.

At field 419, a user can select as an option “All-or-Nothing Trades.”“All-or-Nothing Trades” is a constraint that limits the immediatelyexecutable trade list to include either all or none of the shares of astock included on the outstanding trade list. The optimization maysuggest trading in a wedge any portion of a stock's original tradelistquantity. For example, if a tradelist includes 700 shares of a stock,then a wedge can have any amount of shares between and including 0 and700 shares of the stock; 0, 250, 400 and 700 would all be potentialshare amounts in a wedge. Setting this parameter to TRUE will force thewedge to include either all (700) or none (0) of the stock's shares.

At fields 421 and 423, a user can input a “SELL-BUY Imbalance.”“SELL-BUY Imbalance” is a constraint that limits the immediatelyexecutable trade list to contain more BUYS than SELLS, more SELLS thanBUYS, or and equal number of BUYS and SELLS. This parameter bounds theamount by which the aggregate buy trade value differs from the aggregatesell trade value in an optimized wedge. The bounds can be used to forcemore BUYS than SELLS, more SELLS than BUYS or equal amounts of each tobe in a wedge.

At field 425, a user can input a “Fill Ratio.” “Fill Ratio” is aconstraint that limits the immediately executable trade list to maintaina defined ratio of value between BUYS and SELLS. This parameter is analternate way to specify the BUY-SELL imbalance of a wedge. Many times atradelist starts with an imbalance between its BUY and SELL aggregatevalues, which can be expressed as a ratio of the two values. The FillRatio parameter allows that initial imbalance to be maintained duringeach optimization by bounding the BUY-SELL imbalance of a wedge at theappropriate amount. For example, if a tradelist has $60 in BUY tradesand $40 in SELL trades, then the imbalance is 60:40 or 150%. The wedgecould be constrained to fill $1.5 in BUY trades to each $1 in SELLtrades by setting the fill ratio to 150%.

Using fields 427, 429, 431, and 433, a user can estimate the cost totrade a wedge.

At field 427, a user can input a “Max Size in Percent of Median DailyTrading Volume.” “Maximum Size in Percent of MDV” is a constraint thatlimits the immediately executable trade list to be equal to or less thanthe specified percentage of the 21 day MDV trading volume in the stock.This constraint prevents the optimizer from suggesting trades that wouldbe too large (and costly) to execute during the trading of the wedge.

At fields 429 and 431, a user can enter “Start and End Bins.” “Start andEnd Bins” is a constraint that limits the ACE cost calculations to bebased on user defined start and end times. The ACE cost model calculatestrading costs based on the shares traded in one or more 30 minutesegments during the day. To estimate the cost of trading the shares in awedge, a user can set the start and end times for the wedge using theseinputs.

At field 433, a user can provide for “ACE cost” consideration whenrunning optimization. “ACE Cost” is a constraint that limits the cost oftrading the immediately executable trade list. The choices for thisfield may include Ignore, Bound, Minimize, and Minimize & Bound.According to the selection, the ACE estimated cost of trading a wedgebetween the selected “Start and End Bins” is bounded at a maximum value,minimized or both bounded and minimized, respectively. For example, auser can bound the expected cost of a wedge to be less than or equal to0.5%.

Fields 435, 437, 439, 441, 443, 445, 447, 449, 451, 453, and 455, allare objectives relating to residuals. These settings control theobjective functions that apply to the residual tradelist. They may beapplied to:

-   -   Total residual tradelist—the entire remaining set of trades        including both buy and sell trades, treated as a long-short        portfolio with positive and negative positions.    -   Buy side residuals—the set of remaining buy trades only, treated        as a long-only portfolio.    -   Sell side residuals—the set of remaining sell trades only,        treated as a long-only portfolio.

At field 435, a user can set a benchmark to be used in assessing theTotal, BUY, and SELL Side residuals. The risk of the Total residuals,the tracking risk of the BUY Side residuals, and the tracking risk ofthe SELL Side residuals can be controlled relative to a benchmark. Thebenchmark may be a standard market index or any portfolio of stocksuploaded by a user. The “Tracking Risk” and “Sector Imbalance” settingsin the “BUY Side” and “SELL Side” Residual tradelist are used inconjunction with the benchmark set here.

At field 437, a user can set a risk model. A risk model is provided tocompute the risk of the Total residuals, the tracking risk of the BUYSide residuals, and/or the tracking risk of the SELL Side residuals. Asan example, the entire suite of ITG equity risk models could beprovided. The risk models currently offered by ITG include: USA daily,weekly, monthly; Global Monthly; North America daily; CAN, GBR and AUSdaily.

At fields 439, 445, and 451, a user can employ objectives that apply to“Total Risk”, BUY Side Tracking Risk”, and/or “SELL Side Tracking Risk.”These parameters are used to activate the minimization and/or boundingof the total volatility of the residual tradelists. Choices are, forexample: Ignore, Minimize, Upper Bound, and Minimize & Bound. SelectingMinimize attempts to find the lowest risk residual tradelist that can befound while still meeting all other bounds specified by the user.Setting a Bound creates a hard bound that will be met, if possible,while meeting all other bounds and objectives, such as minimizing wedgecost.

At fields 441, 447, and 453, a user can employ objectives that apply to“Sector Imbalance”. “Total Sector Imbalance”, “BUY Side SectorImbalance”, and/or “SELL Side Sector Imbalance” allow for theminimization and/or bounding of the value of the difference between theresidual total, BUY side, or SELL side trades in each of a plurality ofsectors, including: Basic Materials, Consumer Cyclical, ConsumerNon-Cyclical, Financials, Health, Industrials, Information Technology,Resources, Telecommunication Services, Utilities. Choices are, forexample: Ignore, Minimize, Bound at Current, and Minimize & Bound atCurrent. Selecting Minimize will cause the optimizer to attempt to makethe imbalances in the residual tradelist's sectors as close to zero aspossible. Selecting Bound at Current will create bounds that prevent theresidual tradelist's sector imbalances from being larger than those inthe initial tradelist.

At field 443, a user can employ a “Liquidity” objective. “Liquidity”, inthe context of the present invention, relates to an objective to beachevid by a trader. This objective being implemented using the weightedaverage of median daily trading volume of the residual trades, andallowing for additional functionality in order to achieve an objectivesize of residual trades relative to the trading volume. Choices are, forexample: Ignore, Lower Bound at Current, Maximize, and Lower Bound &Maximize. Lower Bound forces, if possible, the residual tradelist'sweighted average percent of median daily volume is lower or equal tothat of the initial tradelist. Selecting Maximize adds to the objectivefunction a term that encourages the residual trades to be as small aspossible relative to trading volume.

A user can employ objectives relating to buy side and sell side residualtradelist inputs. The inputs available for controlling the properties ofeach side of the residual tradelist separately are the same. However, auser can select each objective independently, allowing for completeflexibility and control over the BUY and SELL residual trades. Eachinput is described once here since it behaves the same way for both ofthe sides.

At fields 449 and 455, a user can employ an objective relating to theconcentrations of both BUY and SELL sides. “BUY Side Concentrations” and“SELL Side Concentrations” allow for additional functionality in orderto achieve a residuals trade list which is made up of stocks found inthe benchmark. This input pertains to the portion of the residualtradelist comprising stocks that are members of Benchmark. In somesituations it is preferable to eliminate (i.e., execute) sooner thetrades of stocks not in a particular Benchmark. Choices are: Ignore,Maximize, Lower Bound, and Maximize & Bound. Setting this parameter toMaximize causes the optimizer to maximize the portion of the residualtradelist that is made of stocks in the Benchmark. Setting a Lower Boundprevents, if possible, the residuals from having a lower portion(weight) in Benchmark stocks than the initial tradelist.

Ultimately the goal of executing a tradelist is to move a set ofportfolio holdings from an initial (or legacy) state to a targetportfolio. Thus, a tradelist exists because a manager desires to movefrom one set of portfolio holdings to another. A tradelist thusrepresents current and/or future positions in a portfolio. One way todescribe this would be: Portfolio holdings (target)=Portfolio holdings(legacy)+Tradelist.

At any point during the execution of the tradelist, the portfolio'sintermediate, transient holdings will be equal to the legacy holdingsadjusted for executed trades. Another way of looking at the situationis: Portfolio holdings (intermediate/during trading)=Portfolio holdings(legacy)+Executions.

Because of the direct connection between a tradelist and an underlyingportfolio, the execution strategy of the tradelist can have significantimpact on the risk and return of the corresponding portfolio. Thetradelist optimizer allows the risk of the underlying portfolio holdingsto be considered when executing a tradelist.

At field 457, a user can select the underlying portfolio to which thetradelist being optimized belongs.

At field 459, a user can select a benchmark, if applicable, that theportfolio's tracking risk is calculated against. If no benchmark is set,then total, instead of tracking, risk is used. Total risk is typicallyappropriate for long-short portfolios, and tracking risk for long-onlyportfolios.

At field 461, a user can select a risk model that can be used tocalculate the total or tracking risk of the portfolio.

At field 463, a user can select a risk objective. “Portfolio HoldingsRisk” allows for the minimization and/or bounding of the volatility of aportfolio's holdings as measured against a defined benchmark using adefined risk model. Choices are, for example: Ignore, Minimize, UpperBound, and Minimize & Bound. Selecting Minimize aims to keep theportfolio's risk as low as possible when the wedge trades are executed(and thus applied to the portfolio holdings). Setting an Upper Boundprevents the risk of the portfolio adjusted for wedge trades from goingabove a specified value.

The following examples are illustrative in nature and are not intendedto limit the present invention:

Example 1

A portfolio includes a short position of $2000 of IBM, and longpositions of $1000 of CSCO and $1000 of GM. A trade list X_(t) is set upto sell $1000 of GM, sell $1000 of CSCO, and buy $2000 of HPQ. Eachcomponent X_(ti) is the signed value of the i stock to be traded. Thus,X_(t1)=1000, X_(t2)=1000, and X_(t3)=−2000 (where unfilled BUYS arenegative and unfilled SELLS are positive. Thus, the trade list is“short” its unfilled BUYS and “long” its unfilled SELLS). The covariancematrix R will reflect the fact that the covariance of CSCO and HPQ ishigh, the covariance of GM and HPQ and GM and CSCO are both low, and thecovariance of IBM and HPQ and IBM and CSCO are both high. In otherwords, CSCO, HPQ and IBM price movements have a positive correlation,while there is little or no correlation between the price movement of GMand any of IBM, CSCO and HPQ. The short position of IBM is representedas −2000. Mathematically, the covariance R₂₃ is large, while R₁₂ and R₁₃are small.

In order to complete half of the trade list in the current wave, theminimal risk residual portfolio X_(r) will consist of an outstandingSELL order for $1000 of CSCO and an outstanding BUY order for $1000 ofHPQ (since the minimum risk to the trade list given that one-half of thelist is to be implemented is to send the SELL order for GM and half ofthe BUY order for HPQ). Because the covariance IBM, CSCO and HPQ is alsohigh, the holdings risk is quite low since the short position IBMholding is not adversely affected by the residual (open) SELL order forCSCO. However, if the portfolio had a $2000 static long position of IBM,the holdings' risk would be quite high because the holdings portfoliowould consist entirely of technology stocks as long positions.

In this manner, this example simultaneously controls the risk of boththe residual trade list and the overall holdings in the portfolio, andthus accounts for the interests of the portfolio manager as well as thetrader in an environment where the trade manager has no constraintslimiting the availability of trades. However, where there is at leastone constraint limiting the number of available trades, a differentmethod or system must be used. An embodiment of the current invention isdiscussed with reference to FIG. 3.

Example 2

Suppose that a portfolio worth $1,000,000 can be broken down into$300,000 of Microsoft, $350,000 of IBM, $200,000 of Google, $100,000 ofDisney, and $50,000 of GE. For this example, the only constraint entereddefines that only “all-or-nothing” trades are available, meaning that ifany shares of a particular stock are to be traded all of the shares ofthat stock contained in the trade list must be traded at the same time.Further, it is the preference of this particular portfolio manger thatan executed trade cannot be more than the amount to be desired in agiven trade wave.

In this example, the portfolio manager has a trade list consisting of$350,000 of IBM, $100,000 of Disney, and $50,000 of GE. Further, theportfolio manager has input his desire to trade 75% of the trade list inone wave. There are several trades that may be executed that conform tothe constraints, however none of these alternatives equal 75% of thetrade list or $375,000. Therefore, it is necessary to figure out whichof the available alternatives comes closest to achieving the desiredtrade quantity. The available alternatives include: trading all of theIBM shares; trading all of the Disney shares; trading all of the GEshares, or trading all of both the Disney and GE shares. Of thesealternatives trading all of the IBM shares is the closest alternative,and therefore, that is the trade that is executed.

One or more aspects of the present invention may includes acomputer-based product, which may be hosted on a storage medium andinclude executable for performing one or more steps of the invention.Such storage mediums can include, but are not limited to, computer disksincluding floppy or optical disks or diskettes, CDROMs, magneto-opticaldisk, ROMs, RAMs, EPROMs, EEPROMs, flash memory, magnetic or opticalcards, or any type of media suitable for storing electronicinstructions, either locally or remotely.

The invention being thus described, it will be apparent to those skilledin the art that the same may be varied in many ways without departingfrom the spirit and scope of the invention. Any and all suchmodifications are intended to be included within the scope of thefollowing claims.

1. A method of managing risk to a portfolio of securities holdings whileexecuting an outstanding trade list, comprising the steps of:determining covariances between securities in the outstanding trade listand securities in the portfolio of holdings; receiving at least oneobjective to be achieved by the trade; receiving at least one constraintfor the execution of a trade; receiving a percentage of value of saidoutstanding trade list desired to be executed in the current wave oftrading; and determining an immediately executable trade list based atleast in part on said covariances, said at least one objective, and saidat lease one constraint, wherein said executable trade list satisfiessaid at least one constraint and said proposed quantity.
 2. The methodas recited in claim 1, further including a step of receiving a requestfor additional immediately executable trade lists at a user definedinterval, said additional immediately executable trade lists beinggenerated and displayed iteratively.
 3. The method as recited in claim1, further including a step of receiving a request for VariableProgress.
 4. The method as recited in claim 1, wherein said at least oneconstraint is chosen from a list comprising: Round Lot Trades,All-or-Nothing Trades, SELL-BUY, Fill Ratio, Maximum Size in Percent ofMedian Daily Trading Volume, Start and End Bins, and Ace Cost.
 5. Themethod as recited in claim 1, wherein said at least one objective ischosen from a list comprising: Total Risk, BUY Tracking Risk Side, SELLSide Tracking Risk, Total Sector Imbalance, BUY Side Sector Imbalance,SELL Side Sector Imbalance, Liquidity, BUY Side Concentration, SELL SideConcentrations, Initial Wedge Size, and Portfolio Holdings Risk.
 6. Themethod as recited in claim 1, wherein said at least one objective isPortfolio Risk.
 7. A system for managing risk to a portfolio ofsecurities holdings while executing an outstanding trade list,comprising: means for determining covariances between securities in theoutstanding trade list and securities in the portfolio of holdings;means for receiving at least one objective to be achieved by the trade;means for receiving at least one constraint for the execution of atrade; means for receiving a percentage of value of said outstandingtrade list desired to be executed in the current wave of trading; andmeans for determining an immediately executable trade list based atleast in part on said covariances, said at least one objective, and saidat lease one constraint, wherein said executable trade list satisfiessaid at least one constraint and said proposed quantity.
 8. The systemas recited in claim 7, further including means for receiving a requestfor additional immediately executable trade lists at a user definedinterval, said additional immediately executable trade lists beinggenerated and displayed iteratively.
 9. The system as recited in claim7, further including means for receiving a request for VariableProgress.
 10. The system as recited in claim 7, wherein said at leastone constraint is chosen from a list comprising: Round Lot Trades,All-or-Nothing Trades, SELL-BUY Imbalance, Fill Ratio, Maximum Size inPercent of Median Daily Trading Volume, Start and End Bins, and AceCost.
 11. The system as recited in claim 7, wherein said at least oneobjective is chosen from a list comprising: Total Risk, BUY TrackingRisk Side, SELL Side Tracking Risk, Total Sector Imbalance, BUY SideSector Imbalance, SELL Side Sector Imbalance, Liquidity, BUY SideConcentration, SELL Side Concentrations, Initial Wedge Size, andPortfolio Holdings Risk.
 12. The system as recited in claim 7, whereinsaid at least one objective is Portfolio Risk.